Auditing Assignment: Analyzing Investment Options for Hamilton Ltd

This auditing assignment report analyzes investment options for Hamilton Ltd, a manufacturing company seeking access to Orange Ltd's patented mobile phone technology. The report examines two investment proposals: purchasing 35% or 80% of Orange Ltd's shares, evaluating the accounting implications and control gained through each option. It discusses related party transactions, subsidiary relationships, and the application of accounting standards like AASB 13 (Fair Value Measurement) and AASB 108 (Accounting Policies). The analysis explores alternative investment strategies, emphasizing the importance of understanding financial statements and accounting policies. The report concludes that acquiring a controlling stake in Orange Ltd is the most effective way for Hamilton Ltd to gain access to the desired technology, and the use of patented technology will help the company in reducing costs. It also underscores the significance of studying annual reports and accounting standards to understand fair value measurements and accounting estimates.

AUDITING ASSIGNMENT

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Prepared By
Student’s Name:
Date: 21st April, 2019

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Contents
Analysis........................................................................................................................................................3
References...................................................................................................................................................5

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Question 1
Memorandum
Date: 6th May 2019
To Management,
From: The Accountant of the Company
Subject: To explore the different Investment options that the company has to get the hold of the patent
technology without actually buying it.
Introduction
In the given case, it was seen that Hamilton has recently become aware that Orange Ltd has several patented
technologies that are related to the manufacture of the mobile phones. The company believes that if they get hold
of these patented technologies then their overall cost related to manufacture shall reduce, but Orange technology
does not want to sell or license the patent technology. In this case it was seen that the management of the
company has reached to two different investment options, in which they will buy shares of the Orange company
and that would indirectly help them in gaining access to these patented technologies. The company has thought
have two options either to buy 35% of the total shareholding of Orange Technologies or buy 80% of the total
shareholding of the company. The accounting treatment and the effect in the books of the company have been
stated below.
Analysis of the TWO OPTIONS
Option one: Buying 35% of the total shareholding of Orange Ltd.
It has been stated that each share has one vote at the Annual General Meeting, so in this case the company will
have 35% voting rights in case of Orange Limited. But as per accounting requirements and as per the authority of
the law, the company needs to have more than 51% of the total voting rights, to become a holding company and
then only they can control the operations of the company and have ownership on the assets of the company.
Having 35% voting rights, will make Orange limited a related party to Hamilton, as every company that has more

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than 20% voting rights in case of any company, it will become a related party to that company. In case there is any
transactions between the two company the same needs to be reported and should be stated clearly in the books
of accounts of the company. But being related party does not give any rights on the assets of the company, so
Hamilton will not gain any access on the ownership of the patented technologies.
Option two: Buying 80% of the total shareholding of Orange Ltd.
It has been already stated that each share will carry one vote at the Annual General Meeting, so in this case the
company is buying 80% of the issued shares of Orange Ltd. So, based on the accounting requirements, the
company needs to have more than 51% of the total issued shares of the company and that will give them more
than 51% of the total voting power in case of Orange Ltd. This will make Orange Ltd, the subsidiary of Hamilton
and that will also give Hamilton indirect access on the assets of the company and the patented technology. With
respect to accounting treatments, the company must provide a combined financial statement of the parent
company along with the subsidiary company. Thus, that will help them in getting access to the patented
technology and they can use the technology for their own production, since Orange Ltd is not licensing it, not
selling it, but it can be controlled by their parent company who holds more than 51% of the voting rights in the
company.
Other Options for investment
Based on the options that are available, there are other options that the company can explore, like buying shares
of 51% of the total shareholding of Orange Ltd. They do not need to buy 80% share, they can buy only 51% of the
shares and have a hold on the assets of the company and the patents technology that they need to have access.
Conclusion
Based on the overall analysis, it can be said that Hamilton can have easily access to the shares of the Orange Ltd.
They need to make smart decisions, as the company is not ready to sell or license the technology. Use of these
patented technology will help the company is making the cost less with respect to manufacture and production of
mobile phones, so it would be better that companies invest in the shares of the Orange Ltd, as that would help
them to gain access to that technology and making that investment will be less costly than the huge production
cost that the company incurs from the production cost on the manufacture of the mobile phones.

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Question 2
a) Two accounting standards that has been selected are-
1. AASB 13 Fair Value Measurement
2. AASB 108 Accounting Policies, Changes in the Accounting Estimates and Errors
These two standards are of great importance as measurement of the items in the financial statements are based
on fair value, nowadays, as historical cost is not the best measure to show how the financial position of the
company. So, having knowledge of the fair value measurement is very important as it helps in understanding how
the financial statements are prepared and the items are valued on global standard basis. Knowledge about
accounting policies and standards is important as it helps the users on what basis the financial statements are
there and in case there are any changes in the accounting estimate and errors, the company needs to show the
same in the annual statement of the company in the notes to accounts section. Thus, these standards are
important.
b) Four important things to do to understand the use of these accounting standards:
1. To study the annual reports of different company to see how the fair value measurement is used.
2. To study the notes of accounts to study whether the company are giving necessary disclosure or not.
3. To study the difference between the accounting estimates and accounting methods and judgements and apply
the same in real life scenarios.
4. To study the importance of fair value measurements and its difference from historical method of costing.

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